The US economy is inching towards outright recession. In the first three months of 2007, growth slowed to 1.3 percent; the worst performance in four years. There are no prizes for guessing why the economy is sliding into the mud; the housing market. Just as rising house prices propelled the economy in 2005 and 2006, the lower prices are taking the economy down. Homeowners are cutting back on those discretionary expenditures that they previously financed with home equity loans.

Slower growth normally calls for an interest rate cut. However, the Fed is stuck in a hole. Inflation remains stubbornly high. In the first three months of 2007, core inflation jumped 2.2 percent, up from 1.8 percent in the fourth quarter of last year. A premature interest rate cut might make Ben Bernanke look soft on inflation. For central bankers, credibility is everything. So what is it going to be Ben? Higher inflation or recession?